Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Items Measured at Fair Value on a Recurring Basis

The following table shows the fair value of our financial assets and financial liabilities that are required to be measured at fair value as of the date shown:

Estimated Fair Value

(In millions)	Balance		Level 1		Level 2		Level 3
March 31, 2020
Assets
Government bonds	$	4	$	—	$	4	$	—
Total assets at fair value	$	4	$	—	$	4	$	—
Liabilities
Derivative instruments - interest rate swaps	$	134	$	—	$	134	$	—
Derivative instruments - CEC Convertible Notes	308		—		308		—
Disputed claims liability	30		—		30		—
Total liabilities at fair value	$	472	$	—	$	472	$	—

December 31, 2019
Assets
Government bonds	$	13	$	—	$	13	$	—
Total assets at fair value	$	13	$	—	$	13	$	—
Liabilities
Derivative instruments - interest rate swaps	$	69	$	—	$	69	$	—
Derivative instruments - CEC Convertible Notes	944		—		944		—
Disputed claims liability	51		—		51		—
Total liabilities at fair value	$	1,064	$	—	$	1,064	$	—

Government Bonds

Investments primarily consist of debt securities held by our captive insurance entities that are traded in active markets, have readily determined market values, and have maturity dates of greater than three months from the date of purchase. These investments primarily represent collateral for several escrow and trust agreements with third-party beneficiaries and are recorded in Deferred charges and other assets while a portion is included in Prepayments and other current assets in our Balance Sheets.

Derivative Instruments

We do not purchase or hold any derivative financial instruments for trading purposes.

CEC Convertible Notes - Derivative Liability

On October 6, 2017, CEC issued $1.1 billion aggregate principal amount of 5.00% convertible senior notes maturing in 2024 (the “CEC Convertible Notes”) pursuant to the Indenture, dated as of October 6, 2017.

The CEC Convertible Notes are convertible at the option of holders into a number of shares of CEC common stock that is equal to approximately 0.139 shares of CEC common stock per $1.00 principal amount of CEC Convertible Notes, which is equal to an initial conversion price of $7.19 per share. If all the shares were issued on October 6, 2017, they would have represented approximately 17.9% of the shares of CEC common stock outstanding on a fully diluted basis. The holders of the CEC Convertible Notes can convert them at any time after issuance. CEC can convert the CEC Convertible Notes beginning in October 2020 if the last reported sale price of CEC common stock equals or exceeds 140% of the conversion price for the CEC Convertible Notes in effect on each of at least 20 trading days during any 30 consecutive trading day period. As of March 31, 2020, an immaterial amount of the CEC Convertible Notes were converted into shares of CEC common stock. An aggregate of 156 million shares of CEC common stock are issuable upon conversion of the CEC Convertible Notes, of which 151 million shares are net of amounts held by CEC. As of March 31, 2020, the remaining life of the CEC Convertible Notes is approximately 4.5 years.

Management analyzed the conversion features for derivative accounting consideration under ASC Topic 815, Derivatives and Hedging, (“ASC 815”) and determined that the CEC Convertible Notes contain bifurcated derivative features and qualify for derivative accounting. In accordance with ASC 815, CEC has bifurcated the conversion features of the CEC Convertible Notes and recorded a derivative liability. The CEC Convertible Notes derivative features are not designated as hedging instruments. The derivative features of the CEC Convertible Notes are carried on CEC’s Balance Sheet at fair value in Deferred credits and other liabilities. The derivative liability is marked-to-market each measurement period and the changes in fair value as a result of fluctuations in the share price of our common stock resulted in a gain of $636 million and a loss of $162 million, which were recorded as a component of Other income/(loss) for the three months ended March 31, 2020 and 2019, respectively, in the Statements of Operations. The derivative liability associated with the CEC Convertible Notes will remain in effect until such time as the underlying convertible notes are exercised or terminated and the resulting derivative liability will be transitioned from a liability to equity as of such date.

Valuation Methodology

The CEC Convertible Notes have a face value of $1.1 billion, an initial term of 7 years, a coupon rate of 5%.

As of March 31, 2020 and December 31, 2019, we estimated the fair value of the CEC Convertible Notes using a market-based approach that incorporated the value of both the straight debt and conversion features of the notes. The valuation model incorporated actively traded prices of the CEC Convertible Notes as of the reporting date, and assumptions regarding the incremental cost of borrowing for CEC. The key assumption used in the valuation model is the actively traded price of CEC Convertible Notes and the incremental cost of borrowing is an indirectly observable input. The fair value for the conversion features of the CEC Convertible Notes is classified as Level 2 measurement.

Key Assumptions as of March 31, 2020 and December 31, 2019:


•	Actively traded price of CEC Convertible Notes - $109.40 and $192.55, respectively


•	Incremental cost of borrowing - 11.5% and 4.0%, respectively

Interest Rate Swap Derivatives

We use interest rate swaps to manage the mix of our debt between fixed and variable rate instruments. As of March 31, 2020, we have entered into ten interest rate swap agreements to fix the interest rate on $3.0 billion of variable rate debt. The interest rate swaps are designated as cash flow hedging instruments. The difference to be paid or received under the terms of the interest rate swap agreements is accrued as interest rates change and recognized as an adjustment to interest expense at settlement. Changes in the variable interest rates to be received pursuant to the terms of the interest rate swap agreements will have a corresponding effect on future cash flows.

The major terms of the interest rate swap agreements as of March 31, 2020 are as follows:



Effective Date	Notional Amount (In millions)	Fixed Rate Paid	Variable Rate Received as of March 31, 2020	Maturity Date
12/31/2018	250	2.274%	1.603%	12/31/2022
12/31/2018	200	2.828%	1.603%	12/31/2022
12/31/2018	600	2.739%	1.603%	12/31/2022
1/1/2019	250	2.153%	1.603%	12/31/2020
1/1/2019	250	2.196%	1.603%	12/31/2021
1/1/2019	400	2.788%	1.603%	12/31/2021
1/1/2019	200	2.828%	1.603%	12/31/2022
1/2/2019	250	2.172%	1.603%	12/31/2020
1/2/2019	200	2.731%	1.603%	12/31/2020
1/2/2019	400	2.707%	1.603%	12/31/2021

Valuation Methodology

The estimated fair values of our interest rate swap derivative instruments are derived from market prices obtained from dealer quotes for similar, but not identical, assets or liabilities. Such quotes represent the estimated amounts we would receive or pay to terminate the contracts. The interest rate swap derivative instruments are included in either Deferred charges and other assets or Deferred credits and other liabilities on our Balance Sheets. Our derivatives are recorded at their fair values, adjusted for the credit rating of the counterparty if the derivative is an asset, or adjusted for the credit rating of the Company if the derivative is a liability. None of our derivative instruments are offset and all were classified as Level 2.

Financial Statement Effect

The effect of derivative instruments designated as hedging instruments on the Balance Sheet for amounts transferred into Accumulated other comprehensive income/(loss) (“AOCI”) before tax was a loss of $65 million and $21 million during the three months ended March 31, 2020 and 2019, respectively. AOCI reclassified to Interest expense on the Statements of Operations was $7 million for the three months ended March 31, 2020. The estimated amount of existing losses that are reported in AOCI at the reporting date that are expected to be reclassified into earnings within the next 12 months is approximately $64 million.

Accumulated Other Comprehensive Income/(Loss)

The changes in AOCI by component, net of tax, for the quarterly periods through March 31, 2020 and 2019 are shown below.



(In millions)	Unrealized Net Gains/(Losses) on Derivative Instruments			Foreign Currency Translation Adjustments			Other			Total
Balances as of December 31, 2019	$	(54	)	$	(7	)	$	—		$	(61	)
Other comprehensive loss before reclassifications	(59		)	(14		)	—			(73		)
Amounts reclassified from accumulated other comprehensive loss	7			—			—			7
Total other comprehensive loss, net of tax	(52		)	(14		)	—			(66		)
Balances as of March 31, 2020	$	(106	)	$	(21	)	$	—		$	(127	)

Balances as of December 31, 2018	$	(13	)	$	(9	)	$	(2	)	$	(24	)
Other comprehensive income/(loss) before reclassifications	(17		)	2			2			(13		)
Total other comprehensive income/(loss), net of tax	(17		)	2			2			(13		)
Balances as of March 31, 2019	$	(30	)	$	(7	)	$	—		$	(37	)

Disputed Claims Liability

CEC and Caesars Entertainment Operating Company, Inc. (“CEOC”) deposited cash, CEC common stock, and CEC Convertible Notes into an escrow trust to be distributed to satisfy certain remaining unsecured claims (excluding debt claims) as they become allowed (see Note 7). We have estimated the fair value of the remaining liability of those claims. As of March 31, 2020, the fair value of the Disputed claims liability is classified as Level 2.

For the three months ended March 31, 2020 and 2019, the changes in fair value related to the disputed claims liability was a gain of $21 million and a loss of $6 million, respectively, which were recorded as components of Other income/(loss) in the Statements of Operations.